By Kendra Marr and David Cho
Washington Post Staff Writers
Thursday, October 30, 2008
General Motors' pursuit of a possible merger with Chrysler is running up against several unresolved issues including whether the companies can line up government financing and win union support, according to people familiar with the matter.
But the talks are progressing on other fronts. One matter that has been decided is that GM's chairman and chief executive G. Richard Wagoner would oversee the combined company, said people who spoke on the condition of anonymity because the talks are private.
Wagoner was in Washington this week to ask the Bush administration for financial assistance with the merger, said an industry source briefed on the matter. Analysts said GM would need at least an additional $10 billion to combine operations and eliminate pieces of Chrysler that overlap with GM.
Treasury secretary Henry M. Paulson Jr. met with Wagoner, but it was unclear whether the department would put money into the merger. Treasury officials declined to comment on the matter.
Sources familiar with Treasury officials' thinking said the department is in negotiations to expand the $700 billion rescue plan to include U.S. auto companies. Under a broad interpretation of the law that authorized the financial rescue package, Detroit's Big Three are eligible for aid. But the Treasury has the authority to determine whether any money will be allocated.
GM's stock rose 8.2 percent yesterday as reports swirled around the negotiations.
If the world's largest automaker absorbed the smallest of Detroit's Big Three, the combination would begin with about 150,000 U.S. employees at more than 100 assembly, parts and stamping plants. And the two would support 600,000 retirees' health care and pensions. Together, the automakers control a web of about 10,000 dealers with sales between $110 billion and $130 billion.
A study by Anderson Economic Group in East Lansing, Mich., estimated that 25,000 to 35,000 jobs could be cut in a GM acquisition of Chrysler, which is owned by private equity firm Cerberus Capital Management.
UAW President Ron Gettelfinger told Detroit radio station WWJ this month he "would not want to see anything that would result in a consolidation that would mean the elimination of additional jobs." UAW spokesman Roger Kerson declined to comment.
Another major issue to resolve is what to do about the automakers' voluntary employee beneficiary associations, or VEBA -- union-run trusts that manage retiree health benefits. The companies continue to pay retiree costs until 2010, when management of the benefit programs shift to the union. A major part of last year's cost-cutting labor agreements, Detroit's Big Three contributed about $43 billion to the union-run trusts, transferring responsibility in the hopes that it would free up funds to better compete with foreign rivals.
However, the GM and Chrysler contracts were not identical, since they independently negotiated these retiree funds with the UAW. New talks, as well as court approval of a revised contract, would likely be needed after any merger -- opening the deal to union opposition.
"This is a whole new level of complexity," said Harley Shaiken, a labor relations professor at the University of California at Berkeley.
Meanwhile, GM has been burning through more than $1 billion a month.
"Without external intervention (from consolidation, government assistance, and substantial operational and financial restructuring), we would expect GM to reach its minimum cash position within the next 12 months," Rod Lache, Deutsche Bank's auto analyst, wrote in a note last week. The company posted a net loss of $15.5 billion in the second quarter. Yesterday GM said it sold 2.11 million vehicles worldwide in the third quarter, a 15-year low and down 11.4 percent from last year.
Chrysler has gone down this road before.
In 1979, Chrysler nearly went bankrupt and it turned to the federal government for a $1.2 billion loan. The company was able to quickly pull itself up, as executives took deep pay cuts and the company invented the iconic minivan. It repaid the loan in four years, and the government even made money off the warrants.
"Nothing like the threat of driving over a cliff to focus the mind," Shaiken said.
At the time, the argument was that Chrysler was too big to fail.
"This time around this is going to be a tougher argument," Shaiken said. "So many jobs likely to be lost in consolidation. It's not really a merger. It's GM swallowing Chrysler."
In Michigan, Gov. Jennifer Granholm (D) has discussed the possible impact of a merger with her cabinet.
"Certainly we know that a merger of the two companies could have a devastating effect on the number of jobs," said Liz Boyd, the governor's spokeswoman.
Boyd called on the government to release $25 billion in direct loans that Congress recently approved to help automakers create energy-efficient vehicles. "The federal government needs to move that money to the auto companies," she said. "It was approved in the budget last year. It has yet to be given or loaned to the companies. We're hearing that it could be months and months. The federal government has to move more quickly."
But Healy E. Baumgardner, an Energy Department spokeswoman, said that the agency has not yet finalized rules governing the loan program. The regulations also face additional legal and administrative reviews.
The department on Monday named Lachlan W. Seward to oversee the $25 billion loan package. Seward, a longtime Treasury official, had been involved with Treasury's Chrysler bailout office in the early 1980s.
Meanwhile, GMAC, the financing arm of General Motors, is in talks to become a bank holding company, a shift that would allow it to take advantage of the government's $700 billion financial rescue package, according to sources familiar with the matter.
Over the past few weeks, GMAC has been discussing the possible change of status with the Federal Reserve, according to the sources, who were familiar with the effort but not authorized to speak about it on the record.
Already facing a cash crunch, GMAC's position has been made even more problematic because of recent problems in global credit markets. Its own borrowing costs have risen, while its dealers and customers have found it more difficult to finance inventory and vehicle purchases. Earlier this month, the company announced it would only make auto loans to people with a credit score of at least 700.
"We are exploring a number of avenues with government to find a solution to the problem of constrained access to funding," GMAC spokeswoman Toni Simonetti said. She declined to comment on GMAC seeking bank holding status.
Cerberus Capital Management controls 51 percent of GMAC, while GM owns 49 percent.
Staff writer Steven Mufson contributed to this report.